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Why Canada Isn't a Safe Haven


Though Canada is a big oil exporter with a healthy banking system, it's the direct connection to crude oil that is dragging it down.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

I've been thinking. I know, that's potentially dangerous, but I've been trying to find a place to hide as Europe's problems with Greece and now Italy make the Euro and the continent suspect. The US clearly hasn't solved the debt ceiling problem yet either. Looking elsewhere around the globe, China has an inflation problem and is starting to raise interest rates. That makes Australia dangerous because their economy is so closely tied to China.

So what about Canada? It's a big oil exporter, its banks didn't blow up on subprime mortgages, and unemployment is much lower than the US. This looks like a good place to hide. Last Friday, the BLS reported a horrendous June nonfarm payroll number. Here comes the dangerous part -- thinking. How do you think the Canadian dollar would immediately react? Logically, it should strengthen because its economy is stronger, but the economy is tied tightly to the US, so a weak US is not great for Canada. Therefore flat to modestly up seems to be a logical call.

The first chart below is the Canadian dollar versus the US dollar, and the giant red down spike in the middle of the chart was precisely at 8:30 last Friday morning when the nonfarm number hit.

Click to enlarge

So the Canadian dollar collapsed on the bad US numbers! What is going on? The answer is on the next chart, which is crude oil for the same time frame. The Canadian dollar trades tick for tick with crude oil. Whether or not it should, doesn't matter because it does.

Click to enlarge

So is there any safe place to hide with everything down big this morning? Look at the final chart.

Click to enlarge

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